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4 Top Bank Picks for Earnings Season From Oppenheimer

NEW YORK (
TheStreet) -- After a very strong run, the banking sector is now "fairly valued," according to Oppenheimer analyst Terry McEvoy, but there are still some undervalued names for investors to focus on.

"We believe the sector is fairly valued following the strong performance this year," with banks trading for roughly 12 to 15 times 2014 earnings estimates and 1.5 to 1.9 times tangible book value, McEvoy wrote in his third-quarter banking industry earnings preview on Tuesday.

The
KBW Bank Index(I:BKX) has risen 19% this year, following a 30% return during 2012.

McEvoy and his research team have "market perform" ratings on most of the regional bank stocks they cover, but the analyst has "four top picks" heading into third-quarter earnings season, including
BB&T(BBT - Get Report),
KeyCorp(KEY - Get Report),
FirstMerit(FMER - Get Report) and
Signature Bank(SBNY - Get Report).

A major theme heading into third-quarter earnings is the decline in mortgage loan production, as rising long-term interest rates have curtailed the refinancing boom and have also led to lower gains on the sale of new loans to
Fannie Mae(FNMA) and
Freddie Mac(FMCC). McEvoy projects a 30% decline in mortgage production revenue for the industry.

Atlantic Equities analyst Richard Staite in his third-quarter earnings preview for eight large-cap banks on Sept. 23 took
an even more negative tone, estimating sequential decline in mortgage revenue of 45% and a year-over-year decline of 55%. Staite also expects the biggest banks to see a 20% year-over-year decline in trading revenue.

"Not having large trading platforms should help
regional banks'
comparisons with the money center/investment banks," McEvoy wrote.

The "big four" U.S. banks trade significantly lower to forward earnings estimates than the P/E ratios for the regional banks of 12 to 15 times cited by McEvoy, reflecting not only the pressure on earnings from lower mortgage activity and declining trading revenue, but also the continued regulatory overhang, including uncertainties over the implementation of some elements of the Dodd-Frank banking reform legislation and a rising bar for capital requirements:

Shares of JPMorgan Chase(JPM) closed at $50.87 Tuesday and traded for 8.5 times the consensus 2014 earnings estimate of $6.00 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $5.74. Analysts on average estimate JPMorgan will report third-quarter net income of $4.794 billion, or $1.21 per share. In comparison, the bank earned $1.60 a share during the second quarter and $1.40 a share during the third quarter of 2012. JPMorgan's revenue is expected to decline to $24.059 billion during the third quarter from $25.958 billion the previous quarter and $25.863 billion a year earlier.

Wells Fargo(WFC) closed at $40.24 Tuesday and traded for 10.1 times the consensus 2014 EPS estimate of $4.00. The consensus 2013 EPS estimate is $3.84. The company is expected to announce third-quarter net income of $5.211 billion, or 97 cents share, compared to 98 cents the previous quarter and 88 cents a year earlier. The consensus third-quarter revenue estimate is $20.993 billion, declining from $21.378 billion in the second quarter and $21.213 billion in the third quarter of 2012.

Bank of America's(BAC - Get Report) shares closed Tuesday at $13.69 and traded for 10.1 times the consensus 2014 EPS estimate of $1.36. The consensus 2013 EPS estimate is 89 cents. Analysts expect the company to post third-quarter net income of $2.169 billion, or 19 cents a share, compared to a 32-cent profit during the second quarter and a break-even third quarter of 2012, when debit valuation adjustments and several one-time items wiped out earnings. The consensus third-quarter revenue estimate is $22.082 billion, compared to $22.727 billion the previous quarter and $20.428 billion a year earlier.

Citigroup(C) closed at $47.67 Tuesday and traded for 8.6 times the consensus 2014 EPS estimate of $5.52. The consensus 2013 EPS estimate is $4.80. Citigroup's consensus third-quarter earnings estimate is $3.253 billion, or $1.06 a share, compared to $1.34 a share in the second quarter, and 15 cents a share in the third quarter of 2012, when the company booked a $2.9 billion after-tax loss on the valuation of its share of the joint brokerage venture with Morgan Stanley(MS). Citigroup's revenue for the third-quarter is projected to total $18.796 billion, down from $20.479 billion the previous quarter, but up considerably from $13.951 billion a year earlier, which included a $4.7 pretax hit from the write-down of Citi's share of the joint venture, which the company was preparing to sell to Morgan Stanley.

JPMorgan and Wells Fargo will kick off bank earnings season early Friday, while Citigroup is scheduled to announce its third-quarter results Oct. 15, with Bank of America following up on Oct. 16.

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